Hacker News Reader

Comment by arethuza | Hacker News Reader

"How do we prevent individuals from spending recklessly?"

How about not bailing out banks that insist on making poor loans?

That might be a start, but probably only if banks were suitably sized and regulated in the first place which wasn't the case this time. Better bank regulation / breaking up banks going forward seems more sensible.

You don't need to regulate banks if you prove to them you are not going to bail them out when they are too loose in their lending practices. They'll go out of business or tighten their lending standards. The real problem here is banks the world over have convinced their people and their governments that having debt-financed possessions is the key to happiness and prosperity.

I would look into Hisotry and Economic Theory befor you make such clames. Specially about the size of banks, the US had strong regulations on bank sizes for a long time (I dont know when the stoped exactlly) and that lead to a massiv amount of bank failure in the great depression. About 8000 Banks failed in the US, most of them single branch (this is in a system with a central bank), while you look at canada where you dont have a central bank (until 1935) you have only one bank failure.

The History shows that some of the banking system with less regulation (and sometimes not central bank) have shown to be much stronger. This is large subject if you are intressting look for "free banking".

The most comprehensive book on the subject is: The Theory of Free Banking: Money Supply under Competitive Note Issue by George Selgin

Download here: http://files.libertyfund.org/files/2307/Selgin_1544_EBk_v5.1...

It might be easier to just go to youtube and look for some videos.

The most importend thing is that you dont just bail out the banks, it dosn't matter what size they are.

It sounds fine to me to have small banks failing with FDIC around. People don't lose their money, and someone with better business sense starts a new branch.

I think deposit insurence is great but Im not sure why the state should provide it. Most of the Bankruns happend befor the FDIC (1933). The problem with the FDIC is just that it makes, that people dont run on banks. Bank runs or often 'good' in the sence that banks that are overleveriged get finally taken down. As sooner as banks are taken town the more return you get for every doller in the bank.

With the FDIC and the FED banks can go on longer then the should and therfore pay back less when they are finally go down.

>I dont know when the stoped exactlly

http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act

'Many commentators have stated that the Gramm-Leach-Bliley Act’s repeal of the affiliation restrictions of the Glass-Steagall Act was an important cause of the late-2000s financial crisis.'

Here in the UK we had something similar with the 'big bang' of bank liberalisation in the 1980s, resulting in the City of London becoming the world's largest financial centre - and subsequent problems.

Whilst I'd look into History and Economic Theory, I wouldn't look to Cato Institute fellows for sensible views on this matter.

Fanny Mea and Fredy Mac pushed down the cost of housing (the where allowed to directly lend from the fed, that had low intresst rates) and set false insentives to build houses. That (among some other small things) was the big thing that led to the crash.

The deregulations allowed banks to be more agressiv, that is only bad if you give them a strong insentiv to be agressiv. Maybe it mad some of them more unstable but it would not have changed the fundamentals of the crash and it is in such a situation only more importent that YOU DONT BAILE THEM OUT.

Prof. Selgin is btw a well regard specialist on banking and money, he does not earn his money from the Cato Institute and they dont direct his research. Its nice that only attack where somebody is working not what they say.kj

Since all you did was paste the first counter argumetn you fund on wikipedia I highly doute that you even no any ecnomics, and only posted it because of your 'deregulation = bad' bias.

I was only mentioning the Free Banking School because of the comment "suitably sized and regulated" is not the only way of looking at things. Infact I think pretty much every economist agrees that the banking regulation pre 1933 where very bad and made the great depression worse. Passing rules to make banks smaller does not really help in itself.

If you have read the article by Stigliz that is refrenced after your comment on wikipedia, you will see that stigliz agrees that the bubble was caused by inflation ("Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble.") and he says:

"The most important consequence of the repeal of Glass-Steagall was indirect - it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail."

What you will notice that he is pro bailing out bank! The banks that failed in the crash where not acctually banks that where "Commerical banks" but the government bailed them out anyways! Its funny that the free-market guys are the ones that are "pro-buissness" acctually its the other way arount people like him are the reason taxpayer are paying for failed banks.

Free Market guys dont go deregulate and then bailout, if a bank investment or not goes done thats what they deserve!

comments or just downvotes?

I don't tend to respond to ungrounded accusations of bias (and to pre-empt a claim, it does not follow that it's inappropriate to choose not to devote much time listening to members of the Cato Institute on the grounds they are members of the Cato Institute). Good day.

What does one have to do with the other? Bailing out banks does not happen so people can still keep spending recklessly, it comes from the belief that letting banks fail will cause major harm to the financial system.

"Financial bailouts of lending institutions by governments, central banks or other institutions can encourage risky lending in the future if those that take the risks come to believe that they will not have to carry the full burden of potential losses."

http://en.wikipedia.org/wiki/Moral_hazard

Reply on news.ycombinator.com